The Central Bank of Nigeria (CBN) is set to move against banks holding large excess reserves of over N330 billion in their vaults.
Addressing journalists at the end of the Monetary Policy Committee (MPC) meeting in Abuja yesterday, the CBN governor, Godwin Emefiele stated that the apex bank was concerned “that banks were holding large excess reserves averaging over N300 billion even when there were ample opportunities for productive and profitable lending to the real sector of the economy.”
This concern he said was “further strengthened by the reality of injecting an additional N866 billion into the system through the redemption of maturing AMCON bonds in October.”
To check this ugly development, the MPC, Emefiele said has directed the CBN “to explore ways of encouraging banks to lend such excess reserves to the real sector” because “given the apathy to lending, banks may be inclined more to placing these new funds in the Standing Deposit Facility (SDF) or use it to increase pressure on the exchange rate.”
The Committee also expressed concern about high banking system liquidity and its potential effects on inflation and the exchange rate.
According to Emefiele, “the policy challenges would include sustaining the stability of the naira exchange rate, managing the vulnerability to capital flow reversal, building fiscal buffers to ensure against global shocks, managing inflation and exchange rate expectations and safeguarding the financial system stability, as well as a buildup in election related spending.”
The MPC noted that the restrictive stance of monetary policy, has provided important defenses against “structural liquidity in the banking system and also reaffirmed the willingness to play a key role in managing expectations around exchange rate and inflation vulnerabilities.”
As a result of all these concerns, Emefiele disclosed that “adequate consideration would need to be accorded the goal of reining-in banking system liquidity to safeguard the objective of price stability.”
Consequently, the MPC decided by a majority vote to: retain the Monetary Policy Rate (MPR) or interest rate at 12 per cent with a corridor of +/- 200 basis points around the midpoint; retain the public sector Cash Reserve Requirement (CRR) at 75.0 per cent; and retain the private sector Cash Reserve Requirement (CRR) at 15.0 per cent.
The decision to retain the rate figures or bring down interest rate as desired, Emefiele said “depends on the size of liquidity and all economic parameters in the Nigerian economy, particularly as we move towards election.
The MPC thinks that although the natural direction is to tighten, we still felt that if we cannot reduce interest rates we should just leave it alone rather than taking it up.”
This he said is “primarily because we think that increasing interest rate will hurt our people, it will lead to some of the companies complaining that the high interest rate will hurt their business and for that reason, we decided to leave interest rate stable.”
“Ordinarily because of the size of liquidity that we see in the system today, what we should have done actually is to tighten further.
“But we will continue to monitor the liquidity system and I can assure you that what we have in our agenda that says that interest rates will gradually come down, is an objective that we will eventually pursue. But we’ll continue to monitor what is happening in the Nigerian economy and all the parameters to be able to determine whether or not we have attained the righ time to move in that direction” he stated.